chapter  8
18 Pages

Competitiveness and comparative advantage: Towards an evolutionary approach to growth and foreign trade

BySTAN METCALFE

Introduction This chapter offers some preliminary ideas in relation to an evolutionary theory of foreign trade. Capitalist economies are never in equilibrium, there are always powerful incentives to seek new profit opportunities, to attack the established market positions of incumbent firms and this Schumpeterian competitive process of mutation and flux holds inevitable consequences for the international distribution of different economic activities. The changing structure of world production is reflected directly in the changing pattern of world trade. In assessing Schumpeterian competition in international terms, an equilibrium theory of comparative advantage is of limited help, for it takes as given the very facts which need explanation, but this does not mean that the concept can be dispensed with altogether. What is needed is an appropriate dynamic concept since patterns of comparative advantage can change dramatically over time, with formerly profitable industries passing into irreversible decline and new industries and locations rising to dominate world production. This is not only a question of the differential growth of different national industries; it is also a question of the entry and exit of different countries in specific lines of production. Industries experiencing the transfer of production capabilities and foreign investment include the cotton textile industry, the television industry, the automotive industry, the steel industry, the natural rubber industry, for example, which all speak in their own historically distinctive ways to this general theme of differential growth, technology transfer and innovation and imitation on an international scale. If we need a theory of comparative advantage we equally need a theory of the competitive, creative firm, because it is innovation and growth at the level of firms which is the direct causal factor behind changes in trade patterns. In turn, this implies that serious attention must also be given to the national institutional context in which firms innovate and grow. In this emphasis Porter is surely right when he argues that we need to go behind comparative advantage to the competitive advantage of the nation. His fundamental point is that “National prosperity is created, not inherited. It does not grow out of a country’s natural enhancements, its labour pool, its interest rate, or its currency value as classic economics insists” (Porter 1998, p. 155). However, one cannot in this way ignore relative costs and exchange rates; we need a nuanced concept of competitive

advantage that connects with the idea of comparative advantage and yet allows for the adaptive consequences of innovation. Krugman’s (1994) critique of the idea of national competitive advantage is well aimed. It turns out that the competitiveness of firms and industries and comparative advantage are complementary notions. This is the theme that we now develop. Before doing so, one or two brief remarks on the literature are appropriate.